OTC Derivatives Markets Contract in H1, FX Bucking the Trend According to BIS Survey

About 11% of the notional amount of outstanding derivatives contracts are now comprised of foreign exchange derivatives, with notional value

BIS LogoAccording to data taken from the Bank of International Settlements’ (BIS) over-the-counter (OTC) derivatives markets survey, OTC derivatives markets contracted slightly in the first half of 2014. As many asset classes (including FX) were at a virtual standstill, the results shouldn’t come as a big surprise.

The total notional amount of outstanding contracts amounted to $691 trillion as of end-June 2014, which is lower by 3% from $711 trillion at end-2013 and back to a similar level as was reported at the end of June of 2013.

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The gross market values of outstanding OTC derivatives continued to trend downwards in the first half of 2014. The gross market value of all contracts totaled $17 trillion at end-June 2014, which is lower by 7% from the $19 trillion at end-2013 and 14% from $20 trillion at end-June 2013.

OTC_Derivatives_FX_Market_Share_by_Currency
Market Share by Currency

In contrast to last year’s data, when contraction was primarily due to the decline in values of interest rate derivatives throughout the first half of 2014, the gross market value of foreign exchange derivatives fell in tandem with interest rate contracts.

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The gross market value of foreign exchange derivatives fell to its lowest level in several years. The market value declined to $1.7 trillion at end-June 2014 from $2.3 trillion at end-2013 and $2.4 trillion at end-June 2013. Contracts against the US dollar, which represented 87% of the notional amount outstanding at end-June 2014, and the yen accounted for most of the decline in gross market values.

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Global OTC Derivatives Market Trends, Source: BIS

That being said, foreign exchange derivatives make up the second largest segment of the global OTC derivatives market as the notional amount of outstanding foreign exchange contracts has continued to increase, marking $75 trillion in the first half of 2014, or 11% of the total OTC derivatives activity – a full percentage point higher than in the second half of 2013.

According to information in the report, the instrument composition of foreign exchange derivatives remains roughly unchanged with forwards and foreign exchange swaps accounting for almost half of the notional amount outstanding, while currency swaps account for the biggest chunk of the gross market value.

Inter-dealer contracts’ market share remained intact, accounting for nearly 50% of contracts with other financial institutions holding the rest.

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Global OTC FX Derivatives Market

The survey included outright forwards, foreign exchange swaps, currency swaps and options.

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